Signals point to last lap of commodities boom

Is liquidity-led commodity price boom coming to an end? This is a question everyone with exposure to markets is asking. Last week witnessed broad-based price declines across the global commodity markets, led by the precious and base metals.

Release of FOMC minutes was the trigger. The market participants interpreted the release of FOMC minutes as hawkish and expected liquidity injections to end sooner. An additional factor impacting commodities was the Chinese government announcement of measures to cool property markets.

While crude oil prices pulled back sharply, the precious metals complex was hit hard. Gold tumbled to multi-month lows, notwithstanding favourable macroeconomic backdrop and signals of rising physical demand. There was huge technical selling. Over the week, gold lost 2.2 per cent to end substantially below the psychological $1,600 an ounce mark.

The yellow metal is beginning to lose its safe haven asset status with improvement in the equities market sentiment. Silver was the worst performer of the week losing 4.6 per cent, followed by platinum (-3.9 per cent) and palladium (-2.9 per cent).

On LME, the base metals tumbled with nickel (-7.6 per cent) and tin (-6.9 per cent). Aluminium moved down by 5.8 per cent and copper shed 4.9 per cent.

On Friday, copper fell to the lowest level in two months and recorded the biggest weekly loss in 14 months amidst a sell-off in most risky assets, remarked an expert. Metals inventory in China showed large increases across the board including copper and aluminium. So, we return to the question whether liquidity-led commodity price boom is coming to an end. May be it is; the current early signals suggest so.

However, policymakers are most likely to exercise a cautious approach and would not disturb the easy money policy unless they are confident of the soundness of economic recovery.

Going forward, once again, commodity fundamentals are likely to assert themselves, but they vary according to markets. As for China’s measures to cool property markets, there is a view that market participants may have overreacted to the announcement.

Gold

As expected, investors have continued to stay off the precious metal as a result of which prices have not only failed to hold on but have actually tumbled. In London on Friday, gold PM Fix was at a 7-month low of $1,577/oz unchanged from the previous day. Silver fared no better with Friday AM Fix of $28.79/oz versus the previous day’s $28.72/oz. Platinum ended the week at $1,611/oz and palladium at $732/oz.

The week also saw huge sell-off (estimated at over one million ounces) in gold ETFs, the largest decline in 18 months. According to experts, it suggests waning interest of longer-term investors. Although ETF positions may be relatively sticky, there is still the risk if sell-off accelerates. What should be of concern to the gold bulls is that despite the positive backdrop of low interest rate and high liquidity coupled with economic growth concerns and geopolitical instabilities, gold prices have plummeted.

The downside risks are rising, if anything. With sustained flow of positive macro data and improving equity markets, gold prices run the risk of further downward movement. The world’s largest importer India is seriously considering further curbs on gold import and consumption. The Budget may shed some light on policy perspective. Imposition of commodity transaction tax on futures transactions appears to be a real possibility.

Base metals

The past week saw the complex suffer a sharp pullback in prices in line with overall weakness across the industrial commodities complex. Nickel and tin were particularly hard hit. With Friday closing (LME cash) of $16,916 a tonne, nickel was down close to 10 per cent from its February peak and the LME cash contract trading at a 3-month low. According to experts, a combination of factors, including concerns over the US Federal Reserve policy direction drove the price decline.

Additionally, post-holidays, China’s participation in the market has not been inspiring. Demand remains soft, premiums are unchanged and physical price discounts are firmly in place while domestic inventories for some metals (especially aluminium) have trended higher over the month, observed an expert. So, developments in China need to be closely watched for early signals of a return to trading activity.

On Friday, aluminium (LME cash) closed at $2,005/t and copper $7,773/t ($7,832/t). Technical analysts see the possibility of further downside in copper, although losses are seen limited by a confluence of support above 7,700.

Crude

The market fundamentals remain fairly balanced. With global demand growth holding steady, non-OPEC supply remains stretched. A retreat in OPEC output from last year’s elevated levels has brought a semblance of balance to the market.

According to experts, the Brent-WTI differential is likely to average $17 for a barrel this year. The geopolitical situation is sill fraught with possibilities.

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